Untangling today's web of mortgage offerings

By Kelly Kennedy Mack

President, Corcoran Sunshine Marketing Group

August 19, 2009

With restrained optimism, the New York real estate community finds itself in a rallying market. Second quarter of 2009 was the strongest we had seen since last summer, due to pent up demand and lower prices. The new development segment has echoed these trends of recovery -- but at a rate that lags the resale market.

The mortgage environment may be the biggest challenge to new development sales right now. Federal guidelines for mortgages have changed, buyers are wary, and confusion abounds. It can be difficult to separate today's reality from the outdated information that continues to circulate.

I recently sat down with Melissa Cohn, founder and owner of Manhattan Mortgage, to have a conversation about mortgages in our category. Melissa is the number one mortgage broker in the country and a foremost expert in new development, having worked with the industry's leading banks, residential brokers, and marketers for years.

We have both seen buyers in recent months who would prefer to buy in new developments and have the ability to do so, but mistakenly believe they will not be able to secure the necessary mortgages. That hesitancy extends, at times, to the brokerage community.

In my interview with Melissa, we explore the obstacles facing new development, the latest in cold, hard mortgage requirements, and most importantly, what New York's top residential brokers can do to be involved -- from setting the foundation for the mortgage process all the way through closing. And we all love closing.

Melissa Cohn (left) and Kelly Kennedy Mack discuss today's turbulent mortgage markets

Kelly Kennedy Mack: Melissa, what are some of the main challenges surrounding mortgages in new development right now?

Melissa Cohn: For buyers, there's no question that financing in new development has become more challenging over the past year. We've all heard about federal guidelines requiring that 70% of the project be sold before financing can occur. Clearly this a major issue and most especially with the large money center banks. But the good news it that there are still a number of lenders in the marketplace that will finance significantly lower pre-sales. There are even lenders who will be the first one to close if the buyer is well-qualified. The rates are dependent on the lender and can sometimes be slightly above market. Bottom line, financing in new development is available -- you just have to shop more carefully.

KM: Can you share some tips for securing a loan?  I'd like to set the record straight about the latest qualifications from banks.

MC: If you are looking to finance in a new development you need to be prepared to put down 20% financing at a minimum, and depending upon the pre-sale, as much as 40%. Down payment requirements drop to 20-30% when a building nears the 40 percent sold mark. Banks will also look for you to qualify with income and assets -- and some will allow you to hold second mortgages. In fact, some developers are even financing those seconds themselves. With so many different lenders, it's important to remember that there is no one standard set of rules.

KM: How much of Manhattan Mortgage's business is in new development?

MC: It's cyclical, but I would estimate that 35% of our business is new development right now.

KM: Let's talk about jumbos. How hard is it to secure a jumbo loan right now?

MC: It's really a myth that jumbo mortgages are unavailable. Today, they are viable and attainable for those who qualify. The average price point in the New York area still hovers around $1 million, and as a company 60% of the loans we originate are jumbo mortgages. The rates on jumbos do vary widely from bank to bank, so it's important to explore your options and work with a mortgage broker who is well-versed in the segment.

Melissa Cohn (left) and Kelly Kennedy Mack

KM: What does it mean when a building is pre-approved, and how long does that pre-approval last?

MC: When a building is pre-approved by a lender, that means that the lender is prepared to close in the building assuming you have a qualified buyer. Getting a building pre-approved can take anywhere from 2-4 weeks or more. One major caveat is that if a building is pre-approved but the lender's guidelines change before closing, the pre-approval can be removed. Sadly, in the past six months, we have seen lenders pre-approve a building and then rescind the pre-approval based upon new bank guidelines. That means that brokers and their customers should never assume that the pre-approval will stand if bank guidelines change.

KM: Developers are now offering some very innovative incentives. What have you seen that's been particularly effective for the buyers you work with?

MC: Obviously, developers have become more negotiable in terms of price, but also in other ways that are very meaningful to buyers. We have seen sponsor second mortgages, seller's concessions for closing costs and, yes, mortgage contingencies as well. The mortgage contingency is very effective selling tool because it gives the buyer the comfort to get mortgage approval and not risk their down payment. If they aren't approved, they've lost nothing, which is a huge psychological boost for buyers and their attorneys. Obviously seller's concessions are very popular -- who wouldn't want to have your closing costs paid for by the seller, especially in a new development where closing costs are not insignificant. Sponsor's seconds (second mortgages financed by the developer) also help out a lot - especially for buyers who signed contracts over a year ago and may have to struggle with a slightly lower appraisal.

KM: How can a residential broker be involved in the mortgage process and steer it in the right direction?

MC: The most important thing a residential broker can do is to be sure their customer is looking in an appropriate building. Pre-vetting a building is almost as important as having the buyer pre-qualified. That includes determining that the building meets pre-sale requirements and has sufficient reserves, and having comprehensive comparable sales data at their fingertips. Top brokers also know that getting the most thorough and accurate information to the lender can do a lot to speed up their response rate. Equally important, brokers need to be upfront with their customers and set realistic expectations. If the buyer has been out of the market for a while, remind them that financing will take longer to obtain. Know and expect that not every bank will approve every buyer.

KM: Time to get out your crystal ball.  I know you get this question a lot, but could you tell me where you think mortgage rates are headed in the future?

MC: Where are rates headed? Rates are driven by the economy, change daily, and react swiftly to good and bad economic reports. In my opinion, the current low-rate environment will continue until the economy gets back on track. When that happens, inflation is likely to rear its ugly head and we will see rates go back up.